MUST DO BETTER NEXT YEAR

It shouldn't have been a 'steep' hill to climb. 'Steep' stands for simplicity, transparency, efficiency, equity and predictability. These are the hallmarks of any good government policy and a Union Budget is no different. A Budget, especially the first one, is not the only instrument of policy and, indeed, as Finance Minister Arun Jaitley said, 45 days is too short a time for preparation, especially since decisions on both taxes such as Goods and Services Tax and expenditure require consultation with states. That said, the goal of the Budget should be clear: To simplify tax and expenditure, the core government functions. A Budget speech is sometimes used to signal broader reform intent-in FDI, capital markets, banking and insurance. On this, one can't fault the liberalisation measures proposed by the minister, barring the caveat that they are incremental. What's special about an equity cap of 49 per cent? Why do we need Foreign Investment Promotion Board (FIPB)? Why should North Block decide whether PSUs invest or not? Do we need Statutory Liquidity Ratio (SLR)? Transparency requires an end to discretion, which is a reason why Doing Business Indicators have been flagged as adverse. Discretion also distorts allocation of resources, and, therefore, is not efficient. Yet, interpreted as small improvements, one can't fault these proposed measures. One can, at best, flag the omissions-the tweaking of MGNREGA, subsidies, land legislation, direct benefit transfer, Centre-state relations, even more dramatic disinvestment-though 45 days may have been too short to bring about these measures.

Simplicity

The core of the Budget is tax and expenditure. Let's take tax first. Any tax structure-direct and indirect- should be simple so that compliance costs and litigation are reduced. And there is much more to litigation than the retrospective clause, advance rulings and transfer pricing. The Budget papers tell us the tax-to-GDP ratio will be 10.6 per cent. That is central taxes alone. Add state and local body taxes and the figure is around 17 per cent. Another 5 per cent of GDP is foregone as tax revenue because of exemptions in both direct (personal and corporate) and indirect taxes. Without eliminating or reducing these exemptions, we can't increase the tax base. Nor can we significantly reduce compliance costs. To make matters worse, the draft Direct Taxes Code (DTC) is too complicated and GST remains stuck until legislation is enacted and states agree.

Transparency

Nevertheless, the finance minister could have made announcements on scrutiny, appeals and refunds; and not just in cases involving large sums. Since reports and recommendations exist, 45 days was more than enough to prepare for this. Indeed, at the very least, a more assuring statement on retrospection was in order. What prevented an announcement about the consultation process with state governments or a more categorical statement about compensation, routed through the Finance Commission, in case of revenue losses from GST?

Efficiency

Direct taxes are more efficient than indirect taxes and more equitable. But consider the Budget proposals item by item, and you will find two strands: A switch from direct taxes to indirect taxes and an exercise of chopping here, changing there. The Government might want to push certain sectors. But how does it know which sectors? How does it know that tax policy is the best way to effect this? Why is housing expenditure preferable to education? Why should service tax apply to advertisements in broadcast media, but not to print media? For simplicity and efficiency, I was hoping for greater standardisation and harmonisation, as a prelude to simplified DTC and GST structures. That's missing, which puts a question mark on the predictability of the tax reform exercise. Sure, direct rates haven't been changed. But why tinker with the indirect taxes and deviate from the base rate of 12 per cent? A genuine intent of reform requires a willingness to not succumb to lobbies. Once the Government has garnered the tax and non-tax resources, there arises the question of prioritisation of expenditure.

Equity

This's where the element of equity comes in. There are always competing demands on resources, which can be raised through growth. So, reviving growth is an important element of the agenda. This can't be done through the Budget alone, but growth requires that plan as well as capital expenditure is not squeezed because of deficit compulsions. Barring the defence sector, capital expenditure hasn't really increased over the past year. So, what should the Union Government spend on? Essentially, for the welfare of disadvantaged groups and geographical areas, and BPL families. In this context, couldn't the Budget speech have been more forthright on possible identification of BPL families and direct benefit transfers? And what's the point of these numerous schemes that Part A of the Budget speech is littered with? Irrigation, rural development, welfare of SCs and STs, women and child development, drinking water and sanitation, health, education, IT, housing development, urbanisation, MSME, infrastructure are all, apparently, important. But assigning paltry sums of Rs 100 crore to schemes is a shotgun approach of hoping that something somewhere will stick. Though these announcements prompt MPs to thump tables, there is a difference between actually pursuing equity and just doing something in the name of the poor. Had this not been the case, the Indian history of the last 67 years would have been different. In the interest of both equity and predictability, I would have expected the finance minister to indicate his priorities and be transparent about it, instead of just dumping more schemes with new names on us.

Predictability

This leaves predictability, which concerns rates and fiscal consolidation. GST rates are still up and direct tax ratios are presumably stable and predictable. Is the proposal to limit fiscal deficit-to-GDP ratio to 4.1 per cent in 2014-15 believable? I don't think so. I don't think the 13.4 per cent nominal GDP growth is achievable either. For with 5.5 per cent real growth, this requires the inflation, measured by GDP deflator, to be under 7.5 per cent. Since that is unlikely, as with the last government, there will be questions about the quality of fiscal marksmanship. And achieving the target of a fiscal deficit-to-GDP ratio of 3.6 per cent in 2015-16 and 3 per cent the following year will be suspect. A more specific three-four year road map would have made this more predictable.

However, with a preparation period of a month and a half, achieving the 'steep' goal proved too steep for the finance minister. Perhaps he will do better next year.

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